Social Media

Facebook Has Gone Public in More Ways Than You Might Think

Facebook has just become a publicly traded company — and almost all its privacy settings are being switched to "public," too, in a trade-off Facebook is making for access to the stock market and potential windfall profits for its biggest shareholders.

As a private company, Facebook was free to keep plenty of secrets from the general public. It could hide away, for example, how much money CEO Mark Zuckerberg took home in annual pay ($1.5 million in 2011) or the intriguing details of the Instragram acquisition — both of which have become known only from the company's S-1 filing.

Now that Facebook's selling stock to the general public, it's going to have to report to the federal government's agency for regulating public companies: the Securities and Exchange Commission, or SEC. Facebook will have to give the SEC three different kinds of reports: one quarterly, one annually, and one every three years.

The reports, which all publicly traded companies must submit, are designed to ensure that Facebook isn't violating any federal securities laws. They'll include anything that could have an impact on future business operations, such as advertising sales or business uncertainties. All of Facebook's reports to the SEC will become a matter of public record, instantly available on the agency's website for the whole world to read (and, perhaps, share on Facebook).

Professor James D. Cox, professor of law at Duke University, said those reports will give outside observers a look at Facebook's inner workings that wasn't possible while the company remained private — and Facebook might find that attention uncomfortable.

"Those reports could reveal some important proprietary information," Cox said. "Companies feel a lot more nimble not being in a fishbowl, now Facebook's going to be in a fishbowl. Facebook is really stepping into a regulatory ball of wax."

Todd Henderson, a professor at The University of Chicago's Law School, agreed that Facebook might find the increased scrutiny unpleasant.

"Facebook is going to have to make enormous disclosures about its business," said Henderson. "It's going to be under much more scrutiny. They now have to reveal information about their business model, where revenue comes from, who sits on the board of directors, how much stock they have, how they're compensated — that's all information that Facebook would rather not share. Transparency brings with it increased scrutiny."

"Sometimes those disclosures can be quite embarrassing, as they recently were for Yahoo," added Henderson, referencing the departure of Yahoo CEO Scott Thompson amid controversy over a falsified academic record.

James J. Angel, associate professor of finance at Georgetown University's McDonough School of Business, had yet another metaphor — and a word of cautionary advice for Facebook about insider trading.

"When you go public, it's like taking the curtains off your windows," said Angel. "And if you don't do that, you can really be in trouble."

Angel said anything the now-public Facebook does that could affect financial statements will become a matter of public record, accessible by journalists, lawyers and the social network's competition. Angel says he believes Facebook will be watched very closely by regulators because of the size of its initial public offering — approximately $100 billion — and because of its worldwide notoriety.

"The SEC will look very closely at insider trading around big price-moving announcements that Facebook makes," said Angel. "I would expect the company to have internal warnings in place saying, 'this is when you can trade, this is when you can't.' This is one of the areas in which the SEC is fairly efficient in tracking down bad guys. If a Facebook insider sells stock the day before bad news comes out, you better expect an unpleasant call with the SEC."

"And even if they don't haul you off to jail, the legal costs are momentous," added Angel.

Do you think the forced transparency is a worthwhile tradeoff for Facebook being allowed to sell stock on the public market? Sound off in the comments below.

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